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Home , George Stigler, Opposition (politics)

Kenneth J. Arrow

A Cautious Case for

The discussion of any important social cannot be partly understood; historical study, question must involve an inextricable mixture sociological inquiry, intellectual debate, and of fact and value. The fundamental impulse to the many dimensions of the political process change and especially to great change is a are all ways in which we do communicate perception of present wrong and a vision of values. But my own values are the starting potential right. The initial impulse must still point, though not the terminus. In the oft- be checked for feasibility; we live in a world of quoted words of the sage Hillel, "If I am not limits, and what we desire may not be for myself, then who is for me?" to which he attainable or it may be attainable only at the immediately added, "and if I am not for expense of other high values. There is an others, then who am I?" ancient warning, "Be careful what you dream This methodological preface is by way of of when young; your dreams may come true!" apology for the extent to which this paper is With the painter Braque, then, I can say, "I an intellectual autobiography. Notice the like the rule that corrects the emotion." But adjective, "intellectual." Anyone who knows that presupposes a strong emotion to begin me will not be surprised; I have always with; and it is there I would like to begin. preferred the contemplative to the active life. I Values and emotions are best apprehended prefer the freedom to see matters from several personally, and I will speak of my own viewpoints, to appreciate ironies, and indeed attitudes and their development. This does to change my opinion as I learn something not mean that my values are all that matter, new. To be politically active means to even to me. I hold that others are free and surrender this freedom. I say nothing against autonomous human beings, each capable of activism for others. It is only through the developing his or her own value system of committed that necessary changes come. But equal worth and respect to my own. But by each to his own path. that very token, the values of others must The great issues of socialism and always retain an element of mystery. The became alive to me, as to so many others, in equal but different emotionally based ax- the Great Depression. My own family was iological drives of others can never be fully severely affected. A precocious high-school communicated. This is not to say that they boy, brought up with excellent newspapers and a family very interested in world events, could hardly help reflecting on the system and its failures. They seemed obvious enough. The This essay was delivered as a lecture at the third Lionel long queues of unemployed at the soup Trilling Seminar of the academic year 1977-78, on April kitchens shown in the newspapers and the 13, at and appears here with newsreels, the waves of bank failures and the permission. personal tragedies of the depositors, the

472 gasping struggles of relatives who tried to run there was no unemployment, at a time when small businesses, and the ominous connection the advanced capitalist economies were between unemployment and the rise of spiraling downward or at best stagnating. Nazism were convincing evidence that the The New York Times was the source of this current economic system was a disaster. The favorable information, much more to be idea, sometimes bruited about then, that believed than the Communist party unemployment was the fault of the pamphlets passed out on the streets. To be unemployed—that they were lazy or incom- sure, the Hearst newspapers were telling us petent or whatnot—struck me as laughable. I about famine and repression in the Ukraine; regret to say that this concept has been revived but who would believe them? My family was by some of my fellow . hardly radical; indeed, they changed from I was impressed not only by the personal Republicans to New Deal Democrats only tragedies of unemployment but also the under the influence of poverty. But the Hearst clearly anomalous coexistence of desperate newspapers were not respectable; my un- needs with keeping idle the resources, men, willingness to trust them as against the Times and machines, which could meet those needs. had perfectly respectable middle-class I was of course economically illiterate, though justification. considering the standard pre-Keynesian I have spoken so far as if efficiency were the textbook this may have been an main value. Indeed, it was true that the advantage. One day I remember working out apparent sheer irrationality of the workings of to my temporary satisfaction an explanation capitalism was a basic condemnation. But as I why the capitalist system could not achieve observed, read, and reflected, the capitalist full employment; it was in effect a Keynesian drive for profits seemed to become a major explanation except that there was no invest- source of evil. Clearly, the individualistic ment at all. I realized, however, that it was a profit drive had something to do with the little too powerful, since there could never uncoordinated inefficiency of capitalism. But, have been any prosperity. more, the drive for profits had other manifestations. The Nye committee, a con- gressional investigating committee, was W hat gave bite and impetus to these engaged in a major investigation of the reflections on the rottenness of the times was munitions industry; its influence over the presence of an alternative possibility. It in creating the fears that has become a truism that a scientific theory, improved its sales seemed to be well however incapable of explaining the facts, will documented. The economic explanations of never be displaced except by another theory. were virtually standard. Charles It is even more true that a social system, Beard and other historians had accustomed political or economic, however bad its us all through their books to seeking an consequences, will be replaced only if there is economic explanation of all political actions. a vision of a better system. The idea of The Constitution represented a certain set of socialism was easily available. One read about economic interests, the Civil War a conflict, it even in textbooks and newspapers, as well sometimes called "irrepressible," of different as in the that major source of education, the profit-seeking groups. Most serious of all, public library. Here we did seem to have a World War I, a tragic living memory, was resolution of our difficulties. Surely, a clearly caused, at least in great measure, by rationally organized, centrally coordinated among the capitalist interests of economic system could avoid the instability of the different powers. the capitalist economy and the terrible human It was in this area of political-economic and material costs of unemployment. interactions that Marxist doctrine was most Further, there was such an economy. The appealing. I was never a Marxist in any literal Soviet Union was building and expanding, sense, unlike a great many of my fellow

473 students at the City College, in New York. vital in my attitude toward socialism. The two Irving Kristol has written an evocative article were and are intimately linked in my mind. on the intensity of intellectual life among the Being killed is, after all, a rather extreme form anti-Stalinist Marxists who foregathered in of deprivation of freedom, and in a typical Alcove One and listed the many eminent modern war, the killer is subject to as much social scientists and literary critics who compulsion as the killed. I tended therefore to emerged from this training. It would appear a a rather pacifist position. This position, to be Marxist background is an essential prere- sure, began increasingly to separate me from a quisite for the development of a neoconser- revolutionary socialist position. vative thinker. On the value of freedom, I don't think I ever I could not follow Marxist doctrine very thought it through; it was just a value that literally for a number of reasons. The labor was taken for granted. Obviously, an theory of value was a stumbling block even American education inculcates such a value before I studied economics with any strongly. However, I was naive or conscien- seriousness; there were too many obvious tious enough to take it very seriously and to be phenomena that it ignored. Nevertheless, the shocked at examples of its denial. Discrimi- insight Marxist theory gave into history and nation against blacks—denial of their particularly as to political events was striking: political rights, segregation in housing and the as the executive committee of the employment—was the most blatant case do- bourgeoisie, the class interpretation of mestically; remember that lynching still political and social conflicts, and the inter- existed. Imperial control of the United States, pretation of war and imperialism as the as in the Philippines, and, much more conflict of competing national capitalist extensively, by Great Britain in India and interests were illuminating and powerful. It Africa, served to demonstrate that political appeared more profound than the alternative freedom had narrow limits under capitalism. versions of the economic interpretation of The freedom of workers seemed to me history; they seemed to be mere muckraking, much restricted. Strike-breaking by fairly the behavior of venal individuals. Marxism direct and brutal methods, as well as more put the system rather than the individual into subtle forms of economic pressure, was a the foreground. common event. Even apart from overt What I drew from this thinking was an conflict, the regular operation of the factory argument for system change. The basic appeared as a form of regimentation and a criterion for change was moral and ethical. I denial of individual freedom an implication did not accept ideas of historical inevitability. then widely accepted, expressed in such What the Marxist analysis did say to me, at movies as Chaplin's Modern Times and Rene least then, was that the system of production Clair's A Nous La Liberte' and, more subtly according to profit established vested in- and profoundly, in Lewis Mumford's terests in destructive activity, most especially Technics and Civilisation, then very famous war and imperialism, but also oppression of and still worthy of rereading. workers and destruction of freedom. I do not believe I ever accepted the theory that racial discrimination was the result of capitalist A broader and less direct form of control endeavors to divide the working class, but I flowed from the concentration of control in certainly accepted the general belief that the American industry, indeed capitalist industry capitalist class would overthrow everywhere. The importance of relatively few rather than lose its power, as it had done in large industrial and financial corporations did Italy and Germany and was then striving to do not need much documentation, and in Spain. numerous investigations documented their Thus, beside the efficiency value, the values scandals. But massive support for the more of freedom and the avoidance of war were scholarly minded came from Berle and

474 Means's The Modern Corporation and resources were used, (2) the avoidance of war , which established not and other political corruptions of the pursuit merely the concentration of the productive of profits, (3) the achievement of freedom sector into large firms but also the concentra- from control by a small elite, (4) equality of tion of control within those firms. Even the income and power, and (5) encouragement of capitalist stockholders were deprived of cooperative as opposed to competitive power, if not wealth. motives in the operation of society. The absorption of the economy by a small From the perspective of greater education elite implied that the formal democracy and and experience and with 40 years of history, freedom was increasingly a sham; the major my understanding of the relation between decisions on which human welfare depended these values and the desirability of socialism were being made by a few, in their own has altered. Many countervailing considera- interests. The same process had another tions have been raised by further analysis and implication, as Marx had argued long before; knowledge of the facts. production was in effect already being carried One problem that I did not face was on in socialized enterprises, so that the shift to highlighted by history almost immediately. If a completely socialist economy would be that capitalism was to be reprehended for its much easier. concentration of control and consequent As some of my examples indicate, I did not inequality of power and lack of freedom for find any sharp line to draw between the values the average man, what would happen under of freedom and of equality. The typical socialism? Did not state ownership imply or at example of lack of freedom was a great least permit overwhelming concentration of inequality of power. Much is made these days power in the hands of a political elite? Soviet of the alleged opposition of freedom and pushed these questions into our equality; but I would have regarded the two as consciousness. For me, the Moscow trials of close to identical in many contexts. As for 1935-36 were a dramatic, even traumatic inequality of income, I took it for granted that turning point. It was clear that the old it would be reduced under socialism by the Bolsheviks were unjustly convicted, and their abolition of the income category of profits. confessions only increased the horror, since it Finally, there was a strong antipathy to an spoke of barbaric pressures. I reflected, too, economic and social system based on selfish that in the improbable event that the charges and competing motivations. I eagerly sought of treason were true, the Stalin regime was confirmation in the works of contemporary equally condemned; for what could induce anthropology, such as Margaret Mead's Sex those who had risked all under the Czars to and Temperament in Three Primitive create this new world to turn against it save a Societies, for the proposition that coopera- deep sense of its evil? However the factsrwere tion was at least as natural as competition. interpreted, they were not compatible with the My pacifist views coincided in a natural idea that the Soviet Union was a democracy way with these broader motivational assump- or was even moving in that direction. tions. Like many others of the time, I was Differences of opinion, even among socialists, strongly attracted by Gandhi's nonviolent were not being tolerated. I had not believed campaigns against British rule. The underly- that the Soviet Union was a genuine ing assumption was the common humanity of democracy at any time, but its political back- ruler and ruled; the appeals to cooperative wardness could easily be explained by history and altruistic motives seemed to have at least and the ring of quite genuine enemies it had. some success as against the simple selfish But now it appeared that as the generation exercise of power. raised under socialism came to adulthood and To sum up, the basic values that motivated as the Soviet Union grew stronger vis-a-vis its my preference for socialism over capitalism enemies, the repression grew greater, not less. were (1) efficiency in making sure that all The true enormity of the Soviet tyranny

475 was revealed only in time. But from my point was the way in which the ideal was to of view, the challenge to socialism was already be achieved. This doctrine was held by many, reasonably clear. At a minimum, the socialist including especially the professor here at economy did not guarantee democracy and Columbia to whom I owe so much, both individual freedom. I had the naive idea that intellectually and personally, Harold Hotell- in the absence of a profit-making class, there ing. Graduate education in economics at would be no class interested in achieving Columbia at that time, just before our power over others. It became clear that this entrance into World War II, seemed curiously view was hardly adequate. The worse problem designed to emphasize the ideal nature of was the possibility that socialism, by concen- neoclassical theory. The dominating voices, trating control of the economy in the state Wesley Mitchell, J. M. Clark, and Arthur F. apparatus, facilitated or Burns, held that neoclassical theory had little even made it inevitable. I return to this vital descriptive value. Though Clark and Burns, at challenge below. least, certainly had no support for socialism, their views, when taken into conjunction with the theorems of welfare economics, resonated I became seriously interested in the study of with my convictions that socialism could yield economics only after beginning graduate a more efficient economy. study around 1940. Needless to say, learning Finally, the development of Keynesian something of the workings of the economic economics and, after the war, its gradually system and of the logic of neoclassical increasing application changed the nature of economics had a considerable effect on my the efficiency discussion. In true Hegelian attitude toward socialism. George Stigler fashion, capitalist instability and the socialist remarked once that the study of economics is counterattack seemed to be synthesized: it a highly conservatizing force. To some extent seemed possible to have an economy that this is true, but only to the extent that any retained much of capitalist drive and initiative increase in knowledge may lead to greater and yet gave room for the to realization of limitations. The inner intervene to avoid at least the worst inefficien- coherence of the economy, the way markets cies of unemployment and the idling of other and the pursuit of self-interest could in resources. I accepted provisionally what principle achieve a major degree of coordina- seemed to be a widespread consensus in the tion without any explicit exchange of euphoria of postwar . The information—in short, the valid elements in state had an active role to play in maintaining 's doctrine of the invisible effective demand and in dealing with the hand—became important possibilities that many imperfections of the market system qualified a simple view of the inefficiency of revealed by theoretical welfare economics— markets. Similarly, the facts of long-term the overcoming of market failures and economic growth in spite of the contemporary monopoly and the realization of economies of economic debacles had to register—though, scale. These interventions should take the to be sure, one could scarcely ask for a greater form of relatively impersonal measures, taxes testimonial to the creative power of capitalism and expenditures, rather than detailed con- than was already contained in the Communist trols and direct regulation. The higher taxes Manifesto. meant that the government was automatically My immediate reaction was to interpret engaged in redistributing, and some of us felt neoclassical economic theory and particularly that it should go much further. the then new and rapidly developing dis- I have spoken of a provisional acceptance. I cipline of welfare economics as pointing to an still felt it important to explore more deeply ideal efficient economy rather than the actual the possibility that socialism was a superior one, marked both by massive unemployment possibility. I was more aware of the complex- and by monopolistic distortion. Socialism ities of operation of a socialist system and

476 sought to develop more deeply the theory of equal. It can be objected that the drive for such a system. I also sought to explore more equality may dull incentives, and the net result fully the criteria for a democratic social will be a reduction in everyone's real income. organization. These matters could be thought This is a legitimate instrumental objection but of as matters for slow reflection and long-term not an objection to the value presumption in analysis, so long as the economy seemed to be favor of equality as such. Many current performing so well and the political process thinkers object to distributive equality on seemed to be responding, however slowly, to principle, on the grounds that it contradicts demands for improvements in efficiency, freedom of property. This is a large subject; I redistribution, and the overcoming of market simply state my conviction that property is defects. The apparent pause in economic itself a social contrivance and cannot be taken growth, the crisis in stabilization policy as an ultimate value, indeed, that institutions occasioned by the current inflationary threats that lead to gross inequalities are affronts to and realities, and the loss of purpose in the equal dignity of humans and can only be redistributional measures all combine to raise accepted as necessary evils. anew the question of alternatives to It certainly seems as obvious as can be that capitalism. In many of our sister , a socialist economy can achieve much closer the issue is much more closely on the agenda income equality than a capitalist economy. than it is here. Beyond that there is the large The category of profits is absent. While we fraction of the world where socialism and now understand that most inequality in authoritarianism coexist in varying degrees of income is due to inequality of so-called labor comfort. And then, since, to twist a phrase of incomes, it is certainly true that the ability to Marx's, every historical phenomenon appears acquire profits increases inequality. Further, as both tragedy and farce, we have the the higher end of the income of professionals widespread solemn use of the word and executives is largely a rent in the "socialism" to cover some of the most absurd economic sense and would be unnecessary in a travesties of that term. socialist society. One needn't ask for utopian dreams of virtually complete equality of income. In a world of any complexity, there must L et me spend the remaining time in necessarily be both antagonistic and reexamining briefly the case for socialism cooperative elements. The model laissez-faire from the viewpoint of the five values men- world of total self-interest would not survive tioned earlier: efficiency, separating political for ten minutes; its actual working depends decisions from selfish economic interests, upon an intricate network of reciprocal freedom, equality of income and power, and obligations, even among competing firms and the stress on cooperative as against in- individuals. But the capitalist system is dividualistic motives. These are not balanced structured so as to minimize cooperative remarks; only the favorable side will be endeavor. The worker is a factor of produc- presented. Perhaps on another occasion I will tion, a purchased item, not a part of a team. present the contrary case. The case for The attempts to handle externalities in recent socialism from each value viewpoint is much years have led to interesting resistances; more refined and complex than I originally antipollution regulations are perceived as a thought, and there are many qualifications threat to profits, not a social gain. Again, that must be made. But I still consider that the socialism is far from a magic cure. Each argument can be made. suborganization, for example industrial For reasons of time, I will deal only briefly plants, will have its own proximate goals, with the last two points. With regard to which will not mesh completely with those of equality of income, let me first remark that I others. But the system should permit a greater am taking it to be a good, other things being internalization of broader goals. It should be

477 easier for a plant to regard product safety as about the needs and production possibilities one of its socially valued outputs. of the members of the economy. In the absence of suitable markets, other coor- dinating and communicating mechanisms are The comparative economic efficiency of needed for efficiency. These come close to capitalism and socialism remains one of the defining the socialist economy, although most controversial areas. The classical admittedly wide variations in the meaning of socialist argument is that the anarchy of that expression are possible. production under capitalism leads to great As I have already suggested, the existence wastage. An appeal to the virtues of the of idle resources is a prime example of system is, in fact, only a partial answer to this coordination failure. The experience of the critique. The central argument, which implies Communist countries bears on this point. the efficiency of a competitive economic With all their difficulties and inefficiencies, system, presupposes that all relevant goods and they are not few, recurrent or prolonged are available at that are the same for all unemployment is not one. A graph of participants and that supplies and demands of economic activity in the United States is, all goods balance. Now virtually all economic under the best of circumstances, jagged and decisions have implications for supplies and spasmodic, that of the Soviet Union much demands on future markets. The concept of smoother. Fluctuations there are, as there capital, the very root of the term "capitalism," must be in anyicomplex dynamic system. But refers to the setting-aside of resources for use the planning, however -inept, serves to keep in future production and sale. Hence, goods the basic resources and their uses in line. to be produced in the future are effectively The sophisticated antisocialist reply to this economic commodities today. For efficient argument is not to deny it but to emphasize resource allocation, the prices of future goods that a socialist system is not an ideal resource- should be known today. But they are not. allocating mechanism either. Much is made of Markets for current goods exist and enable a the obvious inefficienCies of the Communist certain coherence between supply and de- countries, though the Soviet growth rate and mand there. But very few such markets exist technical development has on occasion for delivery of goods in the future. Hence, caused fear and trembling and overall still plans made by different agents may be based averages above the United States rate. As all on inconsistent assumptions about the future. too frequently happens in the social sciences, Investment plans may be excessive or inade- no clear-cut dominance pattern of efficiency quate to meet future demands or to employ can be found either way. All that can be said is the future labor force. that socialism is clearly a viable economic The nonexistence of future markets is no system, contrary to what many would have doubt linked to uncertainty about the future. asserted in the not-too-distant past, and it But this points to an even more severe does not release energies and productivity far shortcoming of the actual capitalist system beyond the capitalist norm. compared with an ideally efficient economic I have referred rather vaguely to the system. The uncertainties themselves are corruption of the political system by narrow relevant commodities and should be priced in economic interests as one of the evils of such an economy. Only a handful of insurance capitalism that might be avoided under policies and, to a limited extent, the stock socialism. More explicitly, a democratic market serve to meet the need for an efficient polity is supposed to be based on egalitarian allocation of risk-bearing. of political power. In a system In the ideal theory of the competitive where virtually all resources are available for economy, market-clearing prices serve as the a price, economic power can be translated communication links that bring into into political power by channels too obvious coherence the widely dispersed knowledge for mention. In a capitalist society, economic

478 power is very unequally distributed, and which he thoroughly disliked, was fully hence democratic government is inevitably compatible with political democracy. It is something of a sham. In a sense, the main- only perhaps with Friedrich von Hayek's The tained ideal of democracy makes matters Road to Serfdom that the association of worse, for it adds the tensions of hypocrisy to capitalism and democracy became a staple of the inequality of power. the procapitalist argument. The association My early assumption that only capitalists itself, however, was not new; it was one of the would have an incentive to influence standard Marxist views, though not held by democratic decisions was too simple. all. The hypothesis was that the resistance of Everyone in an economy has an economic capitalists to the coming of socialism will lead interest. It is also true that individuals have to the subversion of democracy by them. At interests and attitudes that do not derive from least the transition will require the "dic- their economic improvement and may even tatorship of the proletariat," a phrase whose oppose it. But it is today a widespread ambiguities have been only too well clarified doctrine, held by conservatives as well as by history. This Marxist view indeed gives socialists, that concentrated economic in- credit to capitalism for the origins of terests are more than proportionally powerful democracy; it is an appropriate political form, in the political process. George Stigler and his a parallel to the ideas of free contract. So long colleagues have maintained with great vigor as the "contradictions" of the system are not that regulation of industries is usually carried too sharp, the nominal equalization of out in the interests of the regulated and is not political power offers no threat because infrequently originated by them. The reasons economic power is so preponderant. But offered are perfectly in accordance with democracy will decline with the failure of ordinary economic principles; there are capitalism. The experience of Chile, to cite economies of scale in the political process, so only a recent example, certainly gives some that a small economic interest for each of a credence to this theory. large number of individuals is less likely to get Ironically, the current conservative model represented than a large interest by a small explaining the supposed association of number. capitalism and democracy relates to the So long as the state power can be Marxist as a photographic negative to a democratically run, much of this distortion of positive. It too suggests that the political the democratic process should be minimized "superstructure" is determined by the under socialism. Income inequalities should "relations of production." The conservative be greatly reduced. Economic power deriving model contrasts the dispersion of power from managerial control rather than income under capitalist democracy with its concen- should be less easily translatable into political tration under socialism. Political opposition power than under a regime of legally and requires resources. The multiplicity of practically autonomous corporations. capitalists implies that any dissenting voice can find some support. Under socialism, the argument goes, the controlling political W e come then, finally, to what is probably faction can deny its opponents all resources the most serious of all the concerns about and dismiss them from their employment. socialism. Is it in fact compatible with This theoretical argument presupposes a freedom and democracy? It is the fear that monolithic state. It is something of a chicken- socialism may bring tyranny that has in- and-egg proposition. If the democratic legal hibited so many of us from being more active tradition is strong, there are many sources of advocates. power in a modern state. Adding economic It is noteworthy that when Joseph control functions may only increase the Schumpeter wrote on Capitalism, Socialism, diversity of interests within the state and and Democracy, he affirmed that socialism, therefore alternative sources of power. It is

479 notoriously harder for the government to socialist as that term is properly used, have regulate its own agencies than private firms. certainly greatly increased their intervention Socialism may easily offer as much pluralism in the economy. Yet democracy and political as capitalism. and personal freedom have never been The overpowering force in all these stronger in these countries. Indeed, Samuel arguments is the empirical evidence of the Huntington has argued that an excess of Soviet Union and the other Communist democracy makes it difficult to meet the countries, and it is strong. But the contrary current problems of the United States. proposition, that capitalism is a positive The evidence, it seems to me, points to the safeguard for democracy, is hardly a view that the viability of freedom and reasonable inference from experience. The democracy may be quite independent of the example of Nazi Germany shows that no economic system. There can be no complete amount of private enterprise prevents the rise conviction on this score until we can observe a of totalitarianism. Indeed, it is hard to see that viable democratic socialist society. But we capitalism formed a significant impediment. certainly need not fear that gradual moves Nor is Nazi Germany unique; Fascist Italy, toward increasing government intervention Franco's Spain, and the recurrent Latin- or other forms of social experimentation will American dictatorships are illustrative lead to an irreversible slide to "serfdom." counterexamples to the proposition that It would be a pleasure to end this lecture capitalism implies democracy. with a rousing affirmation one way or the Further evidence can be drawn from the other. But as T. S. Eliot told us, that is not increasing role of the state in guiding "how the world will end." Experiment is economic activity. The United States, the perilous, but it is not given to us to refrain United Kindom, and Sweden, though not from the attempt. ❑

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